Hasbro 2009 Annual Report Download - page 24

Our use of third-party manufacturers to produce the majority of our toy products, as well as certain other
products, presents risks to our business.
We own and operate two game and puzzle manufacturing facilities, one in East Longmeadow,
Massachusetts and the other in Waterford, Ireland. However, most of our toy products, in addition to certain
other products, are manufactured by third-party manufacturers, most of whom are located in the People’s
Republic of China. Although our external sources of manufacturing can be shifted, over a period of time, to
alternative sources of supply, should such changes be necessary, if we were prevented or delayed in obtaining
products or components for a material portion of our product line due to political, labor or other factors
beyond our control, including natural disasters or pandemics, our operations would be disrupted, potentially
for a significant period of time, while alternative sources of supply were secured. This delay could
significantly reduce our revenues and profitability, and harm our business.
Given that the majority of our manufacturing is conducted by third-party manufacturers located in the
People’s Republic of China, health conditions and other factors affecting social and economic activity in China
and affecting the movement of people and products into and from China to our major markets, including North
America and Europe, as well as increases in the costs of labor and other costs of doing business in China,
could have a significant negative impact on our operations, revenues and earnings. Factors that could
negatively affect our business include a potential significant revaluation of the Chinese yuan, which may result
in an increase in the cost of producing products in China, increases in labor costs and difficulties in moving
products manufactured in China out of Asia and through the ports on the western coast of North America,
whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, and
natural disasters or health pandemics impacting China. Also, the imposition of trade sanctions or other
regulations by the United States or the European Union against products imported by us from, or the loss of
“normal trade relations” status with, the People’s Republic of China, could significantly increase our cost of
products imported into the United States or Europe and harm our business. Additionally, the suspension of the
operations of a third party manufacturer by government inspectors in China could result in delays to us in
obtaining product and may harm sales.
We require our third-party manufacturers to comply with our Global Business Ethics Principles, which
are designed to prevent products manufactured by or for us from being produced under inhumane or exploitive
conditions. The Global Business Ethics Principles address a number of issues, including working hours and
compensation, health and safety, and abuse and discrimination. In addition, Hasbro requires that our products
supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations,
including consumer and product safety laws in the markets where those products are sold. Hasbro has the
right, both directly and through the use of outside monitors, to monitor compliance by our third-party
manufacturers with our Global Business Ethics Principles and other manufacturing requirements. In addition,
we do quality assurance testing on our products, including products manufactured for us by third parties.
Notwithstanding these requirements and our monitoring and testing of compliance with them, there is always a
risk that one or more of our third-party manufacturers will not comply with our requirements and that we will
not immediately discover such non-compliance. Any failure of our third-party manufacturers to comply with
labor, consumer, product safety or other applicable requirements in manufacturing products for us could result
in damage to our reputation, harm sales of our products and potentially create liability for us.
Part of our strategy for remaining relevant to children is to offer innovative children’s toy and game
electronic products. The margins on many of these products are lower than more traditional toys and
games and such products may have a shorter lifespan than more traditional toys and games. As a result,
sales of children’s toy and game electronic products may lower our overall operating margins and
produce more volatility in our business.
As children have grown “older younger” and have otherwise become interested in more and more
sophisticated and adult products, such as videogames and consumer electronics, at younger and younger ages,
we have sought to keep our products relevant for these consumers. One initiative we have pursued to capture
the interest of children is to offer innovative children’s electronic toys and games. Examples of such products
in the last few years include our I-branded products such as I-DOG and I-CAT, and our FURREAL FRIENDS
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