The China Syndrome

Erik Jay
Whenever the nightly news mentions the adult industry, it usually means Internet porn and movies. Although websites, video-on-demand and DVDs represent a huge piece of the revenue pie, there are many other niches in the adult industry. One that predates adult films by several thousand years is the toy and novelty business.

Numbers are notoriously imprecise — has there ever been "$56 billion up for grabs in the international porn industry," as "Insight on the News" asserted back in 2001? — but the most commonly cited figure for the global adult novelty market is about $2 billion. The industry has a number of players, but a handful stand out as leaders in both revenue and business practices.

One could be forgiven for thinking that outsourcing jobs is some new phenomenon in American business, given the media's penchant for alarmism. The fact is there has been a global market since Marco Polo. David Ricardo and Adam Smith made the business case for "comparative advantage" centuries ago.

Add to this list of historic names Marty and Scott Tucker, founder and current CEO, respectively, of Topco Sales. The elder Tucker, Marty, founded the firm 35 years ago and passed the reins to son Scott in 2001. By 2003, the elder Tucker was settling into Shenzhen, China, the first of five special "enterprise zones" in that rapidly modernizing nation.

He founded High-Tech Novelties (HTN China), providing Topco a lower-cost source for both finished products and components. HTN officially merged into Topco, and there are other reasons than crunched numbers concerning labor costs.

"We've always recognized the various concerns of consumers, retailers and distributors," says Desiree Duffie, Topco's director of marketing and public relations. "Health, environmental and safety concerns are vital to us, and now we will directly oversee the operations there." Total control of the product chain, from design through delivery, gives Topco the ultimate mix of geographic advantage and quality control.

For companies making items that customers insert into their own and others' bodies, this level of quality control is no longer a luxury, according to Topco's way of thinking. Mike Smith, plainspoken and passionate CEO of Tantus, isn't so sure, though. "The entry-level consumer is more afraid of a neighbor seeing him in an adult store than of toxic chemicals," he asserts.

Smith believes in educating consumers. "It is up to the distributors to educate the store personnel — and the sales reps to educate the consumer — about toxic issues. In fact, that's where our brands start coming to life, with the more educated consumers." To put things in perspective, Smith says overcoming homegrown obstacles was more important for his company in recent months than fiddling with any outsourcing figures.

"Ask the retailers," he says, "and they'll say Tantus was its own worst enemy, with billing and shipping problems. But we don't have those issues anymore. This company really began to gel, for the first time since its founding, in January of this year. I don't know if it's our 100 percent made-in-America products, our nontoxic materials or some unknown factor. Probably all three."

Doc Johnson is the company that has dominated the novelty market for decades. Chad Braverman, director of product development and licensing, is understandably proud of the company's famous "ultra-realistic" silicone skin and will protect it at all costs. "We'll never export that," he says, "but any injection-molded ABS or anything involving electronics, like vibrators, we really have to do that in China now."

Most of Doc Johnson's manufacturing takes place "here on the premises in North Hollywood," Braverman says, and the company vows to keep its proprietary products and processes closely guarded. Other products, though, require different scenarios. "No matter how much people love Doc Johnson," Braverman says, "they are just not going to pay $50 or $100 for an American-made vibrator when they can get one from our competitors for 19 bucks."

There is just no way to erase cost from the formula, but there are ways to assure quality even as component unit prices decrease.

Topco's Duffie understand the economics but doesn't buy the nativist argument, especially since "all of our Chinese partners and vendors are registered with the U.S. FDA," which she feels will translate into "safe and healthy" in the minds of American consumers. The Shenzhen connection means that the company has "its finger on the pulse over there," she adds, "and that we have total control over the products. That's what counts.

"When I joined Topco," Duffie recalls, "I learned that referring to the usual media outlets as 'mainstream' automatically defined us as being outside it. And that's not the case."

Clearly, whether the adult market is $2 billion or $50 billion a year, no one plying any kind of adult product should feel marginalized, since multi-billion-dollar markets are mainstream by definition.

"We are in the midst of a renaissance of sorts," Duffie says. "The morals and mores of the culture are changing as the Internet continues to educate people. Time was you couldn't even talk about vibrators, but people are opening up, marketing and advertising are opening up, and the market will experience just huge growth in the future."

Topco has a lot of brands and licenses them widely, but it also does private- label manufacturing, which Duffie says positions Topco well for short- and long-term success.

"Marty really was very much a visionary," she says, "and our 35th anniversary this year feels like a rebirth almost, considering what is happening around the world and with the HTN merger."

The times they are a-changin' — but they'll never change so much that businesses won't have to make a profit. That's as solid a law as gravity. But the technological advances of the past quarter-century have brought new discipline to the once-wild frontiers of the adult industry.

"The old model, with folks being handed a business from some guy in Cleveland, was so profitable for so long that they didn't bother with much analysis," Tantus CEO Smith says. "When seasoned business people and Fortune 500 firms "started coming in from outside the industry, they started asking about market cap and metrics." Content producers and novelty manufacturers alike are now driven by such analytics.

The comparative advantages of doing business in China are compelling, but there is a lot more to a successful business formula than cost control. Reputation, quality, smart marketing and good customer service are all part of a complex calculation that has to be done on a continuous basis. As long as the result of those calculations is satisfied customers, today's obstacles — lingering resistance to foreign-made goods, fear of toxic chemicals, quality- control issues — are guaranteed to fade into the background.

The U.S. is pursuing a broad, new economic engagement with China, the world's largest market, with the adult industry leading the way as it did during the rise of the Internet. Any business contemplating doing business in China should pay attention to what Topco, Tantus and Doc Johnson have learned about both the reality and the perception of transnational partnerships in the adult novelty business.


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