By Play Trail
The toy industry has had plenty of "next big things" over the decades. AI toys may be one of the rare categories that actually lives up to the label, and where you manufacture them is a strategic decision that can define your margins for years to come.
The global AI toy market sits at roughly $2–3 billion in 2025 and is projected to reach $5–6 billion by 2030, growing at three to five times the rate of the broader toy industry. For brands navigating tariff pressure and supply chain risk, this raises an urgent question: where do you actually make these things?
China manufacturing risk is at levels not seen in a generation, and the window to build production depth in Southeast Asia is narrowing faster than many brands expect. Those that move now will have the infrastructure, relationships, and cost advantages locked in before market conditions force the decision.
We've spent time mapping the AI toy landscape against what we know about manufacturing across Vietnam, Thailand, and Indonesia. Here's our read on the opportunity.
Understanding what's driving this market matters before getting into manufacturing strategy.
Generative AI is the engine. Products like Haivivi's BubblePal - a device that clips onto any stuffed animal and powers conversation using large language models - have sold over 200,000 units since mid-2024. FoloToy projected 300,000 units for 2025 after selling 20,000 in Q1 alone. These are not concept products; they are shipping volume at scale.
Legacy players are moving fast. Mattel announced a strategic partnership with OpenAI in June 2025 to bring generative AI to Barbie, Hot Wheels, and American Girl. LEGO, coming off record revenue of approximately $10.8 billion in 2024, partnered with OpenAI for AI-assisted storytelling and launched a computer science and AI education kit. Hasbro, Spin Master, VTech, and LeapFrog are all integrating AI capabilities across their lines.
The demand profile holds up under scrutiny. The 3–8 age group accounts for roughly 58% of AI toy unit sales. Millennial and Gen Z parents are willing to pay the $60–$250 premium these products command, particularly when they carry an educational or screen-free positioning. STEM-focused toys accounted for approximately 60% of educational toy purchases in 2024.
Updated COPPA rules took effect in April 2026, and California has proposed restrictions on AI chatbot toys for younger children. Near-term compliance complexity is real, but the same regulatory environment creates clear space for products aimed at older children, teens, and adult-adjacent categories, and rewards brands that build safety and compliance infrastructure from the start.
For years, consolidating toy production in China's Guangdong province felt like common sense. Shenzhen and Dongguan offer extraordinary ecosystem integration: plush factories minutes away from AI chip suppliers, voice module manufacturers, mold shops, and PCB lines. Chinese manufacturers can pivot to AI toy production in weeks. That depth is real, and the supply chain relationships built there take years to replicate.
The risk calculus has nonetheless changed.
China now faces cumulative US tariff rates of 30% and above, with no clear floor or ceiling in sight. Brands that consolidated manufacturing in China to maximize efficiency are now exposed to policy decisions entirely outside their control. A single tariff announcement can erase margin, force price increases, or strand inventory.
Beyond tariffs, the geopolitical environment introduces risks that are harder to price but impossible to ignore: export controls on advanced semiconductors, potential further trade restrictions, and the broader trajectory of US-China relations. Concentrating production in a single country, particularly one at the center of ongoing trade disputes, is a vulnerability that responsible sourcing strategy can no longer treat as acceptable.
The cost of building Southeast Asia toy manufacturing infrastructure is still manageable. The competitive advantage of doing so is still available. Both of those things become less true with each passing quarter. Brands that invest now, while the choice is still proactive rather than reactive, will be in a far stronger position than those who wait for a crisis to force the move.
No Southeast Asian country has yet replicated the full integrated ecosystem of Guangdong. What Vietnam, Thailand, and Indonesia offer today is a rapidly improving foundation, built at a moment when the cost of entry is still low and the first-mover advantage is still real.
Vietnam has become the first choice for brands building a China+1 toy sourcing strategy, and its trajectory in AI toy manufacturing specifically is accelerating.
LEGO's $1.3 billion factory in Binh Duong province, which opened in April 2025 with over 4,000 employees and LEED Platinum certification, is one of the clearest signals of where the industry is heading. This is not a backup facility or a hedge; it is one of the world's most sophisticated toy manufacturing facilities making a generational bet on Vietnam. GFT Group, Vietnam's largest OEM toy manufacturer, operates five facilities with over 15,000 workers and 550+ injection molding machines, producing for Hasbro, Mattel, Spin Master, and Funko. Mattel produces Barbie and Hot Wheels here. Hasbro has already reduced its China manufacturing share from 86% toward an estimated 60%, with Vietnam absorbing the majority of that shift.
On the electronics side, Vietnam's capabilities have matured considerably. Foxconn has committed over $1.5 billion to Vietnamese operations, including a dedicated PCB manufacturing plant in Bac Ninh. Samsung accounts for 30% of Vietnam's total electronics exports. SMT assembly lines handling 1,000+ components per board are operational across multiple EMS providers, covering the core infrastructure AI toy production requires.
The cost and tariff numbers tell a clear story. Factory line workers earn $320–$450 per month versus $950–$1,100 in Shenzhen and Dongguan, roughly 50% lower. Vietnam's current US tariff rate of approximately 15% compares very favorably to China's 30%+ burden. Vietnam also holds 15 active free trade agreements including CPTPP, EVFTA, and RCEP, providing preferential market access well beyond the US.
Vietnam is the most complete China alternative for toy manufacturing available in Southeast Asia today. Brands entering now benefit from an ecosystem that is still developing, which means more flexibility, more partner willingness, and better terms than will be available once the market matures.
Thailand is the most underrated China alternative for toy sourcing, particularly for AI toy brands that need serious electronics capability alongside traditional toy manufacturing.
Thailand's electronics manufacturing base is exceptional: roughly 80% of global hard disk drives are produced here, the sector generates over $34 billion in annual exports, and precision assembly talent is deep and established. Key EMS manufacturers with direct relevance to AI toy production include Cal-Comp Electronics, SVI PCL, Hana Microelectronics, and KCE Electronics, Southeast Asia's largest PCB manufacturer. The Eastern Economic Corridor has attracted the equivalent of $56 billion in FDI over five years, with smart electronics as the leading investment category.
Thailand's Board of Investment incentives are among the most attractive in the region. Smart electronics manufacturers, a category AI toys qualify for given their sensors, wireless connectivity, and embedded software, are eligible for up to eight-year corporate income tax exemptions, extending to 13 years for advanced semiconductor and PCB projects.
The opportunity in Thailand right now stems from the combination of mature electronics infrastructure and an early-stage toy manufacturing ecosystem. Brands establishing toy production partnerships here today are getting ahead of what is likely to become a competitive market within five years. Thailand's current US tariff rate of 19%, negotiated down from 36% in July 2025, makes the case for acting sooner rather than sitting on the decision.
Indonesia's scale alone makes it strategically significant. With 270 million people, a median age of around 30, and one of the fastest-growing middle classes in the world, it functions as both a manufacturing base and one of the most attractive consumer toy markets in the region. The US absorbs 48% of Indonesia's current toy exports, which reached $610 million in 2024, up 13.8% year-over-year.
Major players are already moving in. PT Royal Regent Indonesia's Kendal Industrial Park facility produces for Disney and Walmart at 850,000 pieces per month. Cititoy has committed $60 million to a new facility in Subang Smartpolitan. MGA Entertainment has flagged Indonesia as part of its China diversification strategy. Apple's reported negotiation of a $1 billion AirTag facility in Batam, if completed, would significantly raise the electronics manufacturing profile of the zone.
Indonesia's SEZ incentives are among the most generous available: 10–20 year corporate income tax holidays, import duty exemptions, and super deductions for R&D and vocational training. At approximately $207 per month, labor costs are the lowest of the three markets.
AI toy production in Indonesia is at an early stage. For sourcing teams looking to establish a position before the market fills in, that is precisely the right time to be building relationships. Infrastructure investment, workforce development, and electronics supply chain depth are all trending in the right direction, backed by a government that has explicitly identified AI industry development as a national priority.
For brands evaluating China alternatives in toy manufacturing, the practical near-term approach is a staged transition: use Southeast Asian facilities for final assembly and plastic or plush body manufacturing while managing component sourcing strategically, including from China where necessary.
Over time, as Vietnam's electronics localization improves, Thailand's toy ecosystem develops, and Indonesia's infrastructure matures, dependency on Chinese components reduces naturally.
This is not an argument for patience. Every month of deeper entrenchment in China-only production extends exposure to tariff escalation, potential export controls, and geopolitical disruption that brands cannot control. The companies best positioned in 2028 and beyond are those building Southeast Asian manufacturing depth today.
The AI toy market is growing at three to five times the industry average. The tariff environment rewards brands with manufacturing options. Southeast Asia delivers the cost structure and strategic flexibility this moment requires.
What are the best alternatives to China for toy manufacturing? Vietnam, Thailand, and Indonesia are the leading China alternatives for toy manufacturing in 2025. Vietnam offers the most developed ecosystem, with major brands including LEGO, Mattel, and Hasbro already producing at scale. Thailand provides world-class electronics infrastructure ideal for AI and connected toys. Indonesia offers the lowest labor costs and significant government incentives, with a growing domestic market as an added strategic advantage.
Why are toy brands moving manufacturing out of China? Cumulative US tariff rates on Chinese goods now exceed 30%, directly compressing margins on toys produced in Guangdong and Shenzhen. Geopolitical risk, potential export controls on advanced semiconductors, and supply chain concentration concerns are also driving brands to build China+1 or full diversification strategies. Southeast Asia, particularly Vietnam, has emerged as the primary destination for this manufacturing shift.
How much cheaper is toy manufacturing in Vietnam compared to China? Factory labor costs in Vietnam are roughly 50% lower than in Shenzhen and Dongguan, at $320–$450 per month versus $950–$1,100. Vietnam also benefits from a current US tariff rate of approximately 15%, compared to China's 30%+, creating a combined cost advantage that significantly improves landed margins for brands sourcing in Vietnam.
Is Vietnam good for AI toy manufacturing? Yes. Vietnam has developed strong electronics manufacturing capabilities relevant to AI toy production, including PCB assembly, SMT lines, and sensor integration. Foxconn's over $1.5 billion investment in PCB manufacturing in Bac Ninh and Samsung's major operations in the country underpin a growing electronics supply chain. Combined with established plush and injection-molded toy production from manufacturers like GFT Group, Vietnam is the most complete Southeast Asian option for AI toy sourcing today.
What incentives does Thailand offer for electronics and toy manufacturing? Thailand's Board of Investment offers up to eight-year corporate income tax exemptions for smart electronics manufacturing, extending to 13 years for advanced semiconductor and PCB projects above defined investment thresholds. The Eastern Economic Corridor provides additional infrastructure and streamlined investor support. Thailand's current US tariff rate of 19% is among the more favorable in the region for brands exporting to North America.
What is a China+1 sourcing strategy for toy brands? A China+1 strategy means maintaining some manufacturing in China while building production capacity in at least one additional country, typically in Southeast Asia, to reduce dependency and tariff exposure. For toy brands, this commonly involves moving final assembly, plush manufacturing, or injection-molded components to Vietnam, Thailand, or Indonesia while managing chip and electronics component sourcing in parallel. The goal is supply chain resilience, not immediate total relocation.
We work with toy brands at every stage of Southeast Asian sourcing, from factory identification and capability assessment through to quality control, compliance support, and logistics coordination. Our networks across Vietnam, Thailand, and Indonesia mean we can give you a clear picture of what's achievable in each market for your specific product, and help you build the manufacturing relationships that will matter most as the market develops.
If you're evaluating China's alternative toy manufacturing options in Southeast Asia, we'd welcome a conversation.
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