Chinese toy recalls show need for stringent quality control

This week's recall of millions of toys from China isn't just kids' stuff. It is focusing fresh attention on whether corporations are doing enough to ensure product safety in an era of outsourced and globalized manufacturing.

Mattel is hardly a fly-by-night operation. It's the largest US toymaker and had measures in place for tracking and enforcing quality control. Unlike many toymakers, it actually owns and runs some of its own factories in China.

Yet as of Tuesday, 18 million Mattel toys from China are on recall, and many consumers are wondering, if it can happen on this scale with this company, who will it happen with next?

As concerns about safety have mounted this year, US-based toymakers have already been in damage-control mode. They have launched a range of preventive and defensive measures: redesigning products, relabeling, adding new layers of inspection. Despite all that, the recall problems could spell slower toy sales this holiday season.

China, too, faces a big public-relations challenge, since this week's events simply add to a tide of bad news about product safety.

But the low-cost economics of overseas production remain compelling for corporations. The question isn't whether to have a far-flung supply chain, but how to manage it.

"These supply chains are becoming much more sophisticated …. It's going to require new approaches" for quality control, says Eric Johnson, a professor at the Tuck School of Business at Dartmouth College in Hanover, N.H. "The issue for multinationals operating there now is, how do you manage the supplier's supplier?"

The fact that Mattel ran into trouble, he says, hints at the difficulties facing any industry.

"I view them as one of the best" in the toy category, says Mr. Johnson. "They were in China long before China was cool in terms of low-cost sourcing," and run a number of their own facilities there.

Increasingly, it's not just product assembly that occurs in developing nations such as China, but the production of materials such as paint as well.

One aspect of Tuesday's recall involved a Mattel partner, which changed paint vendors and received pigment containing lead.

"While the painting subcontractor, HLD, was required to utilize paint supplied directly from [the company specified by Mattel], it instead violated Mattel's standards and utilized paint from a non-authorized, third-party supplier," Mattel said in its recall statement.

The problem underscores the layers of control – and shared responsibilities – involved in global production. Mattel had many standards, but "they didn't have a process in place to make sure that an approved supplier was being used," says David Hennessey, a marketing expert at Babson College in Wellesley, Mass.

In addition to lead paint, much of Tuesday's recall by Mattel was of toys that contain tiny magnets that can be ingested by children.

In all, the recalls affect a range of popular toys, from Polly Pocket and Doggie Daycare to the Sarge vehicle from the movie "Cars."

The magnet recall involves toys made from 2002 through early this year, when the health risks of such magnets became clear.

"No system is perfect," Mattel chief executive Robert Eckert said in a TV interview, describing the multiple inspections in place for each batch of toys.

But the toy debacle has amplified concerns that Chinese suppliers pose particular risks when it comes to product safety. This year, toys have shared headline space with toothpaste, pet food, and tires regarding such concerns.

The US Consumer Product Safety Commission announced a record number of recalls of defective products in 2006. This has coincided with record imports of goods from China.

Donald Mays, a product-safety expert at the Consumers Union, testified last month that Chinese products now account for nearly 60 percent of product recalls.

"We believe the responsibility for safety has to be firmly attached to each link in the supply chain," Mr. Mays told a Senate committee. "Producers, importers, distributors and retailers, as well as government safety agencies, have to own that responsibility."

Experts on global manufacturing say the issue goes beyond China, however. In toys and other industries, producers are locating production in many low-cost nations where similar problems can crop up.

"It's largely due to the length and complexity of the supply chain," says Donald Rosenfield of the Massachusetts Institute of Technology's Sloan School in Cambridge. But "there's clearly some nasty things going on in China."

The concern about product safety has become part of a larger debate in Congress about the US-China trade relationship – including alleged currency manipulation, illegal subsidies, and piracy of intellectual property.

This is coming to a head after years of roaring growth in Chinese production.

"The core problem is that there's just been this huge surge in imports" from China and other low-cost nations, says Robert Scott, a trade economist at the Economic Policy Institute in Washington. Firms "have to make heavy investments in testing those products," and so far have not done nearly enough, he says.

In the case of toys, the industry is scrambling to burnish its image.

The vast majority of toys are safe, but that fact doesn't mollify worried parents.

Toy-industry analysts are paring back their forecasts of holiday sales, at least modestly.

Garrick Johnson, of BMO Capital Markets in New York, cut his forecast for Mattel's 2007 revenues by $25 million after Tuesday's recall news. Total sales for the company could reach nearly $6 billion this year, he says, but with the risk of "further recalls or declines in consumer spending on toys."

Like Mattel, other companies in the industry are scrutinizing their supply-chain policies.

RC2, which makes Thomas the Tank Engine products and other toys, faced its own lead-paint recall this year. It launched an internal investigation, began auditing contractors' factories, and increased its testing of products and materials.

Mega Brands has redesigned and relabled its magnetic toys, in a $35 million recovery effort after an April recall.

Mattel, for its part, took out full-page ads in major newspapers to reassure parents of its commitment to their children's safety.

In Congress, some lawmakers are wondering if the industry needs new regulation or monitoring to make sure toys meet US standards.

"If they don't, I believe Congress must give federal regulators the authority to ensure that our kids' toys won't actually harm them," Rep. Mike Ferguson (R) of New Jersey said this week, according to the Associated Press.

Sen. Bill Nelson (D) of Florida is sponsoring a proposed Children's Products Safety Act. "There's going to have to be a private sector independent panel such as Underwriters Laboratory that would have to certify the safety," he said in a recent hearing.