LEGO Manufacturing creates luxury toys for Chinese children

LEGO Manufacturing Creates Luxury Toys for Chinese Children On the top floor of a high-rise office building on Shanghai’s iconic Huaihai Road, Jørgen Vig Knudstorp, the global president and CEO of the LEGO Group, sits in an office overlooking this bustling metropolis. Occasionally glancing at the view outside the window, his expression carries a hint of satisfaction. Just a day earlier, LEGO held a groundbreaking ceremony attended by the Queen of Denmark in a new factory in Jiaxing, Zhejiang, about 100 kilometers from Shanghai. “Coming here (Shanghai) is my dream,” Knudstorp said, though this dream wasn’t always swayed by the low-key and modest CEO. At 46, he is the only external CEO in the 82-year-old Danish family business and has led the company for a decade. Unlike the typical image of a corporate executive, Knudstorp wears round glasses reminiscent of Harry Potter and sports a thick beard that rivals his hair. Strangers might mistake him for a university professor or an IT engineer, not the head of a global toy giant. Yet, he quickly returns to his rational and prudent demeanor, emphasizing, “Of course, we know how big the challenge is in the Chinese market. For now, North America and Europe remain our core markets.” Knudstorp first visited China as a traveler in the 1990s and began frequent trips after becoming CEO in 2004. In 2010, he quietly brought the group’s senior management team to Shanghai, announcing the launch of the “Lego China” program, including production, marketing, and logistics teams. “Look at Shanghai— isn’t this the next New York? Only when we are here, we won’t miss the opportunity here,” he told them. The LEGO brand is well-known in Western countries and is the world’s largest building toy company. It is estimated that there are 94 LEGO bricks per person globally, with Germany averaging 8 boxes per child in 2013. In 2013, LEGO produced over 55 billion components worldwide, with 915 million building blocks for every six of the same color. Google co-founder Larry Page used LEGO bricks to build a printable full-featured inkjet printer, and even today, LEGO blocks are still used in MENSA recruitment testing. In 2013, the LEGO Group achieved revenue of 25.4 billion Danish kroner, making it the second-largest toy company globally. Its net profit was over 6.1 billion DKK, with a net profit margin of 24%. While North America and Europe saw declines or stagnant growth, LEGO's revenue and net profit grew by 11% and 9%, respectively, continuing its long-term high-speed growth. In contrast, competitors like Mattel and Hasbro struggled due to the global economic crisis. Today, the LEGO Group is owned by the third and fourth generations of the Christensen family: Kjeld Kirk Kristiansen and his three children. In 2014, Kyle ranked 109th on the Forbes Global Rich List with $10.9 billion in assets. However, 10 years ago, LEGO was in a very different situation. By 2003, the company was on the brink of bankruptcy. The expiration of patents for its self-locking building blocks allowed other companies to produce compatible products, and the rise of digital games threatened its traditional toy market. Kyle, then CEO, tried to reverse the decline by introducing expensive new production lines and increasing the number of new toys. However, these efforts had little impact, and sales barely increased by 4% over four years. In 1998, LEGO suffered its first loss in history. By 2001, Kyle admitted that the company was losing its vitality and happiness. In 1998, Kyle hired Poul Plougmann, known as the “miracle creator,” and launched the “Innovation 7 Rule.” These principles included attracting diverse talent, focusing on blue ocean markets, being customer-centric, practicing disruptive innovation, promoting open innovation, and building an innovative culture. Despite these strategies, LEGO continued to struggle, and by 2003, sales dropped significantly, leading to huge losses. In June 2003, Jørgen Vig Knudstorp, then vice president of strategic development, presented a research report showing LEGO’s precarious situation. Many board members were skeptical, but Knudstorp’s insights eventually led to his promotion to CEO. Knudstorp, who holds a doctorate in economics, was raised in an intellectual family that encouraged creativity. He often built his own Legoland on a table tennis table as a child. His background in mathematics, computer programming, and language helped shape his innovative thinking. After earning his PhD, Knudstorp worked as a teacher and later as a consultant at McKinsey before joining LEGO in 2001. He studied every department of the company, interviewed executives and employees, and analyzed successful experiences to identify problems. Knudstorp concluded that large companies often fail not from hunger but from indigestion. He realized that LEGO was trying too many innovations too quickly, leading to confusion and financial losses. Despite the challenges, Knudstorp was entrusted with a critical role. In 2003, he led LEGO back to profitability, doubling its size and making it the most profitable toy company in the world. His strategy focused on returning to the core business, even asking the company to "forget innovation" for a while. Today, LEGO’s story is a classic case in business schools. With a focus on its core business, LEGO once again entered a golden age. According to Euromonitor International, LEGO outperformed its rivals between 2012 and 2017, remaining the leader in building toys. However, the question remains: How large is the market for traditional LEGO bricks? Should LEGO diversify, and how will the digital entertainment world affect its traditional toy business? Experts suggest that while diversification can create value, it is not simple. LEGO’s focus on building blocks is seen as both a strength and a risk. The company’s 2013 financial statements show that almost all revenue comes from building blocks, with brand licensing accounting for less than 2%. Expanding into China and Asia is key to LEGO’s continued growth. Globally, the U.S. is LEGO’s largest single-country market, followed by Europe. Asia, including China, still represents a smaller share. However, the Chinese market has shown strong growth, with sales increasing by 40%-50% in recent years. While the Chinese market presents challenges, LEGO is determined to enter it. As Knudstorp says, “Globalization is our most important strategy at the moment.” In China, LEGO faces a unique market where toys are not yet a necessity for children. However, the demand for quality and safety is growing, and LEGO’s commitment to quality helps protect against piracy. LEGO’s new manufacturing base in Jiaxing is a key part of its strategy. It will reduce costs and improve supply efficiency in Asia. The factory is designed to be modern and intelligent, not just for cost-cutting but to meet growing demand. As LEGO expands into Asia, understanding and integrating Eastern culture becomes essential. While LEGO’s success has been in the West, adapting to the Chinese market requires careful consideration of local preferences and media. Digital games may also pose a challenge, but LEGO believes physical toys and digital entertainment can coexist. The company is exploring ways to combine building blocks with digital content, while staying true to its core values. Ultimately, LEGO’s future depends on balancing innovation, tradition, and cultural adaptation. As Knudstorp says, “We want to do the best in the field we are good at. We don’t pursue scale first, but quality.”

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