Seven Questions: China’s Total Toy Recall

SCOTT OLSON/Getty Images NewsToy story: In August alone, Mattel recalled millions of toys manufactured in China.

FOREIGN POLICY: On August 14, Mattel, the worlds largest toy maker, recalled millions of toys manufactured in China. Add those items to the problems weve seen with other Chinese-made products this yeardog food, toothpaste, computer batteriesand it seems weve got an epidemic on our hands. Are production standards growing more lax in China, or are consumers just becoming more vigilant? Or is it all just hysteria?

Eric Johnson: There are a few phenomena going on. Toys have been manufactured in China long before the country was cool in terms of low-cost outsourcing. Most of the big companies, particularly Mattel and Hasbro, have a long series of successful operations in China. So, its not like they are new to China.

But there have been some interesting changes in the past decade. Ten years ago, companies like Mattel were outsourcing to some key vendors, but oftentimes they still controlled much of the supply network. For example, the paint, the plastic, etc., were typically coming from other multinationals. And as China has matured in toy making, the toy companies supplier base has grown larger. There are literally thousands of plants and subcontracting relationships. The quality problems are not with what we would call the first-tier suppliers, but the suppliers to the suppliers.

FP: How well do the major toy companies track quality control on their own? Mattel runs a few of its own factories in China, but what about other toy manufacturers?

EJ: Mattel is in many ways one of the better companies. They are very sophisticated in their Chinese operations. Thats because they run plants, not just in China, but throughout Southeast Asia. They have their own plants in Indonesia and Thailand, which have even lower costs. China will not be the low-cost labor supplier forever.

But when you get out of the [main] supplier base, youll find a real range of capabilities and quality-control measures. That means a lot of these companies will have to be more vigilant in the way they operate with their contractors. The larger problem is one Ill call concentrated manufacturing. Thats really at the root of the pet-food issues, where you have a few very large players in China that are supplying many different brands. What shocked Americans about that [incident] was that it wasnt just the Winn-Dixie brand or the Wal-Mart brand. It was suddenly just about every brand they could possibly buy when they went to the supermarket. That phenomenon exists in toys, too. There are some very large companies in the back end of the supply chain that supply everybody.

FP: China dominates global toy production. Two thirds of Mattels toys are manufactured there, and 80 percent of toys sold in the United States are made in China. Given the recent recalls, will we see a shift to other markets in the years to come?

EJ: China is like the Silicon Valley of toys: There are literally thousands of very good toy suppliers there. There are manufacturers who just focus on plush toys and then there are people who just focus on injection-molded plastic and people who die cast, like Hot Wheels and Matchbox cars. So, for companies that dont do any of their own production, they really dont have anywhere to go but China. Thailand has a toy industry with some big players like Mattel, but its nothing like China. And its difficult to shift those capabilities.

FP: What is China doing to improve quality inspection?

EJ: In working with managers and companies, I would never advise them to rely on China to fix this. Chinas oversight on a national level isnt very mature at this point; much of the oversight that occurs in China is more localized. You will certainly see a lot more pressure on the manufacturers in the toy-producing regions, such as Guangzhou and Shenzhen, to clean up their act because [the recalls] are hugely embarrassing. But its still naive to imagine that Chinas own regulatory capabilities are going to be able to control quality. Mattel is ultimately responsible for whats coming into the United Statesits their brand at stake.

FP: So, the burden sits with the companies. Do these larger companies need to institute higher standards for quality control?

EJ: Absolutely. But the reality is that Mattel is already very careful, because it isnt the only issue they face in China. If you go back 10 years, you will find a whole host of stories about child labor in toy factories in China. Mattel has been very sensitive to these kinds of issues for a long time because they have a big brand that is going to be the focus of a lot of media attention when things go wrong.

There have been a lot of calls [in the United States] for increased inspection, and I would agree that, especially in the short term, thats probably the requirement. But the bigger issue facing Mattel and everybody doing business in China is that they are going to have to make investments in Western quality-management techniques in their suppliers. It will save them in the long term. They went to China to save a bunch of money, and now they are finding that they need to spend some money to save some money. Mattel has a lot of feet on the ground in China, which is one of the things you need to do a good job. But I worry about a lot of the smaller toy companies; many of them dont have the resources in place.

FP: Whats the level of risk when these recalls are put into place? A Chinese official said shortly after the Mattel recall that the health risk from being exposed to the toys in question was extremely minor.

EJ: The toy industry always has to live to a higher standard in terms of safety. But the recalls themselves, if you look at what Mattel actually recalled, are pretty surgical. For example, one of the Mattel recalls last week was for particular toys that employed these curiously strong, small magnets. That doesnt have anything to do with quality, and its not about China per se. These magnets became popular a few years ago, and in fact, there are a lot of really cool toys that use them. For age-appropriate purchases, they really arent a problem. But if they are ingested by little kids, then there is a huge problem.

Its something the toy industry has every year. We have choking recalls and suffocation recalls all the time. When it gets out into the press, many times it gets exaggerated or blown up.

FP: So, how will these recallsand the resulting consumer anxietyaffect the holiday shopping season?

EJ: There is very little that can change about this upcoming holiday season other than toy companies putting better inspection processes in place. But trying to shift production out of China is impossible at this point; many of the deals for this Christmas were made months ago. The major toy fair in the United States is in February and historically that is when a lot of deals between the retailers and the toy makers occur. September and October are the height of the shipping season in terms of products arriving into ports. Many of those toys are already in containers, sitting in docks in Hong Kong, and products for the holidays are already flowing into the United States. If consumers try to avoid buying Chinese toys this year, there will not be very much under the Christmas tree.

M. Eric Johnson is a professor of operations management at Dartmouth Universitys Tuck School of Business.

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