LEGO Has Built a Factory in Jiaxing. We Asked Its Global CEO Where “Learning Through Play” Goes Next in China

If it won't bring prices down, what does LEGO actually get out of building a factory in Jiaxing?

LEGO's factory in Jiaxing was formally completed in late November. For Chinese consumers and for LEGO, the biggest consequence may be this: the days when the hit sets sell out and the shelves stay empty can finally end.

That mattered enough that Huang Dezhi, LEGO's senior vice president and general manager of Asia manufacturing, brought it up five times in roughly 90 minutes of group and one-on-one interviews.

Until the Jiaxing factory was built, everything LEGO sold in China came from its European plants. Headquarters in Denmark had to forecast Chinese demand two months ahead, pick the most suitable items out of more than 600 products, then spend a month and a half shipping them over. That carried two risks: the forecast could be wrong, and once a product started selling out, restocking often came too late to catch the best selling window.

Huang Dezhi said the Frozen line now on sale in China has run into exactly that. Fixing this will matter more in 2017, because that is the year LEGO plans to start opening its own branded stores in China — six cities first, Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin and Hangzhou, growing to 40 cities by 2020.

LEGO's business in China is still small. On current numbers, China ranks far below Europe and the US, and behind Southeast Asia as well. LEGO has not yet pushed into China's small and mid-sized cities, where retail is more complicated. But, as you always hear, the company keeps returning to how fast this market is growing and how much room it has.

In the LEGO Group's fiscal 2014 annual report, China was for the first time put in the same bracket as mature markets like Britain, France and the US. Ground was broken on the Jiaxing factory that same year.

Asked to explain the company's recent growth rate in China, Jacob Kragh, senior vice president and general manager for China, told QDaily it came down to “the rise of China's middle class.” “More and more parents now have higher disposable income and can spend more of it on their children. Chinese parents are increasingly willing to buy products that are safe and high-quality and that also teach their kids something — that fits what LEGO offers in China perfectly.”

Kragh also pointed to the marketing effect of “more than 120 LEGO Education centers.” LEGO Education and LEGO toys both sit inside the LEGO Group, but they run separately and feed each other.

What LEGO has to do in China is, in Kragh's view, very clear: “Over the next decade or two, we have to make sure we reach more children and give them a really good experience.”

Like every other company selling to children, LEGO is glad of China's two-child policy, because it means an already huge market gets bigger, and for now LEGO does not have to deal with the falling birth rates that trouble other markets. Huang Dezhi put it more bluntly: “Right now China has about as many children as the US has adults.”

What separates LEGO from other toy companies is that its brand is tied more directly to creativity. All play teaches children something, but a brand that actively preaches “learning through play” is especially welcome to parents.

“Chinese parents get more involved in picking their children's toys, and they have more say in it. Kids have a real voice too — children have a lot of influence in China. I think Chinese parents are deeply involved in what their kids consume, which means the factors behind each family's final decision to buy a toy are different,” Kragh said. When it sells, he stressed, LEGO has to keep “fun” and “learning” in balance.

All of that, though, is decided at headquarters in Denmark. LEGO does not build special lines for local markets, which means the main value of an expensive new factory is simply faster supply. Asked whether prices would come down, Huang Dezhi said too many things go into pricing, and localizing manufacturing at this stage is not enough on its own to move it. And because the Jiaxing factory is not yet running at full capacity, it is still an expensive plant to operate.

LEGO's factories do have local elements. Jiaxing mainly supplies Asia, the Mexico plant mainly supplies North America, and LEGO adjusts what it makes, and how much, to each market's demand. Jiaxing set up its injection molding and packaging departments before its parts-processing department, precisely so it could package parts to Asian demand and ship them out fast — “you want Batman, we make you Batman; you want Superman, we make you Superman.”

For now, not a single box of LEGO can be assembled from start to finish inside this factory. Some parts still come from elsewhere.

LEGO even treats hiring as part of promoting the brand. Many of the workers at the Jiaxing factory knew little about LEGO before they joined. So on top of the briefings and training, LEGO sometimes has workers put down what they are doing and build with the bricks. “Only when you build it yourself do you see that with the instructions in front of you, every color has to match, and if it doesn't you can't finish. We want them to feel what it's like when one [brick] is missing, so that none goes missing,” Kragh said.

LEGO has sold bricks since it designed and started making them in 1958, and the business has not changed in any basic way since: make bricks, sell bricks, sell more bricks.

In 2014 the LEGO Group's total sales reached $2.03 billion, just ahead of Mattel's $2 billion, making it the world's largest toy company.

LEGO's current CEO, Jørgen Vig Knudstorp, does not think the ranking matters. He told QDaily that LEGO “doesn't need to be the biggest company.” “What matters for the toy industry, I think, is that LEGO sets an example on children-related issues.”

When Knudstorp took the job in 2004, LEGO was in deep trouble. According to LEGO: A World of Innovators (《乐高：创新者的世界》), the turnaround specialist Poul Plougmann took over LEGO's day-to-day management in 1998; by 2003, talking to the Danish paper Børsen, he described the company as “surprisingly bad, close to ruin.” At the start of 2004, 94% of LEGO sets lost money, and only the Star Wars and Bionicle lines were profitable.

The family firm was doing too many things that had nothing to do with bricks. Knudstorp, who came from McKinsey, set survival as the task, saying “the company needed to refocus on bricks — everything had to be about bricks, connected to bricks.” He quickly closed loss-making lines, cut staff heavily, sold property to lower costs, and dropped unrelated businesses so that new product development answered to commercial logic. Development also got much faster, from three years down to six months; today at least 60% of LEGO's products each year are new.

Knudstorp also had LEGO deal with consumers directly, most visibly by visiting families at home. “You have to talk with children and understand what appeals to them most.” Because LEGO watched how children handled test products, the construction and police sets in the 2005 LEGO City line brought in 350 million Danish kroner (about 348 million yuan), more than three times what they had earned before.

By the end of 2005 LEGO was back in profit. With survival settled, it developed more licensed products tied to hit films and launched LEGO Friends for girls, and became the winner of the toy market.

On attitudes to toys, Knudstorp thinks parents in China and the West are much alike: “What can they learn? What kind of growth does my child get from playing with these toys? Is it safe? Not just mechanically safe, but chemically? Can we trust this company?”

But as noted above, those 120-plus LEGO Education centers have pushed the brand harder here than in other countries. In China, plenty of parents and children meet LEGO through LEGO Education first. Training outfits trading on the LEGO name have multiplied fast, which says something about how keen Chinese parents are. Search Baidu for “LEGO classes” and you will find no shortage of outfits passing themselves off as LEGO Education; a newcomer has a hard time telling which one is the official center.

LEGO's fast growth in China began around 2012 and 2013. Its biggest advantage over an ordinary toy maker is flexibility: with the brick as the basic unit, it can keep issuing different combinations to match the shifting interests of small children.

“Two years is a long time for a child — they grow so much. So at every stage of their life you have to beat the competition and win their hearts,” Jørgen Vig Knudstorp said.

As for whether parents who put their children in front of LEGO for the sake of “learning through play” are being too calculating, the CEO's answer was: “Don't tell the kids.”

That was not all he said. You can read more of his answer in the interview below.

Q = QDaily

J = Jørgen Vig Knudstorp

Q: LEGO already had factories in Hungary, the Czech Republic and Mexico. How were the market conditions when those were built different from the conditions around this China factory?

J: The two are comparable. Hungary and Mexico were built in recent years; the Czech one was built many years ago. What Hungary and China have in common is fast growth, and we found the cost of working with the government was fairly high in both cases — the procedures and the available labor force were similar too.

Q: Were those factories also built to meet demand in their own regions?

J: We build to supply the world, but also the region we're in. The factories in Denmark, the Czech Republic and Hungary supplied Asia at first, and then we realized Asia was growing so fast and it took too long to ship products there, so we started looking for a suitable site here. This Jiaxing factory is a very good thing for us — we now have a sizable factory in China, on the coast, and close to important markets like Japan and South Korea.

Q: Is the high growth in China different from growth in Europe and the US? How do you see China's rising middle class — how are they different from Europe, the US and Japan before them, especially in spending on toys?

J: It's very different from growth in places like Europe and the US. Growth in China is bigger, because we're still building the brand here; some people have never seen LEGO before, and at the same time we have a solid customer base in certain areas, especially first-tier cities.

The difference isn't big. I find this quite interesting — when we visit Chinese families in apartments and private houses and talk with Chinese consumers, what they worry about is close to what Western consumers worry about: What can they learn? What kind of growth does my child get from playing with these toys? Is it safe? Not just mechanically safe, but chemically? Can we trust this company? Questions like that. It's close to what I hear talking with families in Germany.

Q: Do consumers in other countries worry about safety the way Chinese consumers do?

J: In both countries consumers trust LEGO a great deal. But you'd be surprised — German consumers worry about whether toys are safe too. Of course they trust LEGO, but from what we've recorded they still ask a lot of questions. In some ways it really is quite similar.

Q: In China, out of all the toy categories, many parents lean toward LEGO because they want their children to pick up certain skills. Some primary school entrance tests even include building with LEGO. What do you make of that?

J: First, it's true that playing with toys helps children grow. LEGO toys have a particular quality — they really do push children to create things and to think in a good, systematic, structured way. So I think playing with LEGO gives children benefits that last a lifetime. Parents are right to think this way: let kids play now, give them time to play, let them think about how to make things and understand structure.

I don't know much about the tests, so I probably shouldn't comment. What matters, I think, is that we connect play with learning, creativity with safety, and that the bricks are high-quality, they grip, they don't break — that matters more than studying for one particular exam.

Q: Was “learning through play” LEGO's intention from the start?

J: When the company was founded, LEGO was one of the first companies to put this idea forward — I don't know whether any other company said it. Even now, in many cultures, “learning through play” still isn't well accepted. We've held to it since the company was founded. Five or 10 years ago, I think, a lot of people still couldn't accept or respect the idea. As far as I know, no other company has thought this way all along.

Q: Some parents, when they let their children play, care mainly about making them learn rather than about their having fun. What do you think of that?

J: Don't tell the kids.

What I mean is, why is play such a useful way to learn? Because the motivation is inside us — we want to learn, and that's what lets us play. Play has levels and goals, and you want to achieve something while you play. The point is not to let the goal take over. The goal can be there, but the person playing decides to learn because they want to play better — that's a completely different thing.

Q: In 2014 LEGO became the No. 1 toy company. What does that mean for LEGO and for the toy market?

J: It doesn't mean anything. We want to be the best company, not the biggest. I'm not even sure we're No. 1 by revenue — I don't look at that. What we focus on is whether we're delivering the best play experience, the best building experience, a level of quality and safety others can't match. If another company is bigger than us, that's fine; we don't need to be the biggest company.

It doesn't mean much for the market either. What matters for the toy industry, I think, is the example LEGO sets on children-related issues. We recently started setting rules for marketing to children — what is acceptable in advertising to kids. We've set digital safety rules for keeping children safe when they play LEGO's online games, so that no commercial body can get their names, their emails and so on. That's how we lead in the toy industry — not every company does this — and the same goes for quality, where we've set a good example on raising the bar. This is where we hope to be different from other companies, and better.

Q: Over your 12 years as CEO, what do you think is the biggest change you've brought to LEGO?

J: At the very least I can say that one of the things I'm proudest of is that we have deeply engaged, motivated employees who bring a lot of creativity to their work, and at the same time customers and consumers who really value us and are satisfied with us. The most basic idea behind the LEGO brand, I think, is that employees enjoy the work and give it their best ideas and energy, customers are satisfied and talk about the products and what they want, and out of that you get a thriving business that makes money and survives for the long run. I think we've done that, and that's what satisfies me most — building a business that keeps growing and surviving.

Q: You became CEO in 2004, when the company was in trouble. What did you have to solve, and how did you solve it?

J: The company needed to refocus on bricks — everything had to be about bricks, connected to bricks. We saw the brick as our huge advantage; that was one side of it. The other side was improving operations, manufacturing and so on, getting better and more commercially driven. Improving the products, making them more appealing and newer — now 60% of our products are new every year. Doing more research, having to talk with children to understand what appeals to them most. In 2004 all of that badly needed to improve and change.

Q: What kind of problems was the company facing before that?

J: Probably trying to make everything about bricks while juggling a lot of other activities at the same time. When you invest heavily in many other areas, you pay less attention to the core product, and the core product suffers and isn't as good as it was, because people's attention has gone elsewhere.

Q: Over roughly the past decade, what has changed in the toy market? Do you think LEGO led that change?

J: Look back over the past decade and LEGO grew very fast, while the industry as a whole grew much less. LEGO's lead shows, I think, in concentrating on one kind of product — on bricks, on learning through play, on safety, quality, employee engagement, and on social responsibility too; we're the only one running on renewable energy as our base. LEGO gives back to society in a very systematic way, and there's a lot going on here in Jiaxing as well. We care about the materials we use, and we're looking for sustainable ones.

On products and marketing, we started making TV series and LEGO films, doing things in new ways. We opened our own branded stores and had considerable success — early on, a lot of this was something only we were doing.

Q: Who do you think LEGO's biggest competitor is now? People traditionally think of Mattel or Hasbro.

J: Our competitors are the other things families want to buy for their children — sometimes they buy video games or online games, sometimes they buy LEGO. Narrowly, there are other brands like LEGO, where you build things and there are minifigures; broadly, there are brands like Mattel. But on the whole it's really about everything else that gets spent on children. LEGO has grown because our share of that spending has been rising.

Q: What do you see as the current trends in the toy market? How do you make sure you're going in the right direction?

J: For the future we have four or five guiding principles. We want to benefit from digital technology, strengthen the core business, understand what customers think of us, and understand how children recommend us to others. I think we understand fairly well where we're heading and how to act on these plans. There is still a lot we can do — we haven't entered many markets yet, India for instance. But right now our focus is China, which is also why this factory matters so much to us. We believe it can contribute to China's economic reform and modernization, to becoming more consumer-oriented and more innovative, and to economic development.

We also see that people in China are very interested in learning through play, and we can do a lot of important work through LEGO Education, together with the education sector. In the end it's all about making LEGO part of Chinese society. Manufacturing, building offices — in Singapore we have great people doing product development, service, marketing and sales. We hope to contribute a great deal to Chinese society, and in the end to build a strong record of social responsibility, with a positive effect in the markets where we do business.

Q: What children want changes very fast, and LEGO's product lines update much faster now. LEGO is also tying itself more to entertainment — feature films, games and so on. Do you think this trend will continue, and what does it do to LEGO?

J: Children are only interested in things they find appealing and easy to understand. Fortunately for LEGO, we've been able to give children things they find appealing and easy to understand, consistently. There's no such thing as brand loyalty with children — they won't buy something because their parents bought it, or because they bought it themselves two years ago. Two years is a long time for a child; they grow so much. So at every stage of their life you have to beat the competition and win their hearts, and we do that by keeping the products fresh, exciting and appealing all the time. In the toy industry that counts for a great deal.

Product lines started updating faster after 2004 — that's a long time ago now.

Q: What do you think people commonly misunderstand about the toy industry?

J: I don't know. I don't know of any big misunderstanding.

Q: For people working in toys, what do you think is the most valuable talent?

J: I can't speak for the whole industry. What I can say is that for people who work at LEGO, a few things matter. LEGO matters more than your own ego; you have to think about the collective and the whole company, not just your own area and your own interests — everyone has to contribute together. We value people who act, correct things, check plans to make sure they're right, but don't spend too long planning. You need to move things forward, and you really need to look outside the company for inspiration. Start from the child. Sometimes when you're developing something you end up thinking about price, about fitting the product plan — you really need to think about the child and the retail customer.

Q: LEGO is in a fairly fast growth phase. What do you think you need to watch out for? Is there anything you've been worried about lately?

J: When you're growing as fast as we are, I think you have to work out how to expand fast. When you enter a new market you need good systems so the business gets running quickly. When a company gets big, things get complicated, and you need to tidy up from time to time so that everything stays in order. Those are the things to watch when growth is very fast.

The third thing, and probably the one I worry about most, is whether we can get the right people — high-quality people to solve new problems. Because growth is so fast, that matters a great deal.

Cover image: Flickr and LEGO