That's actually needle felted onto him! It's plan ol' wool....it's the stuff I use on my other creations (FeltLings) and figured that would be PERFECT for him ....make sure you attach the arms and legs really well... I've had to repair Hambo's arms as he is VERY loved by his Mom. (She carries him around on her shoulders a lot... ha!)
Heehee... well, that one was made from cloth versus my needle felted characters... It was a medium I usually don't work with (I don't really like to sew all that much). My friend inspired me -- she's adorable, is so talented and loves to cosplay, so I couldn't NOT try to make him for her. They truly look fab together.