August 29, 2007 After Stumbling, Mattel Cracks Down in China By LOUISE STORY The alarm bell went off for Mattel just as it was preparing to announce that it would recall 1.5 million Chinese-made toys tainted with lead paint Surrounded by boxes of Barbie dolls, Hot Wheels cars and other sample toys, Thomas A Debrowski, Mattel’s executive vice president for worldwide operations, was leading a tense early morning trans-Pacific telephone conference with his team in Hong Kong, where it was p.m At the time, recalled Mr Debrowski, Mattel thought it was dealing with at most “a single failure, from a single vendor who made a big mistake.” But in the middle of the meeting on July 30, Mattel learned otherwise “I’ve got bad news,” interrupted David Lewis, senior vice president for Asian operations, who had just taken a call from the company’s safety lab in Shenzhen, China, where toys made by outside companies are tested “We’ve had another failure It was one of the toys in the Pixar cars.” That was the moment that threw Mattel into turmoil, forcing the company — long considered one of the more successful Western manufacturers in China — to recognize that it had more of a systemic problem than simply an isolated case of one bad paint supplier Now Mattel, which appears to have stumbled in part because it had become overconfident about its ability to operate in China without major problems, is in crisis mode Toys for the coming holiday shopping season are already shipping across the Pacific, and Mattel wants to catch any other problems that may have slipped through — before those toys land on store shelves and cause even greater damage to its reputation A big problem was that some of Mattel’s trusted vendors had turned to cheaper paint suppliers outside the company’s approved list Mattel is now racing to increase its supply and product testing, no longer giving local contractors several months at a time to the tests themselves Mattel executives are openly saying that there may be more recalls, if the company finds more problems in its investigation And Mattel has quietly carted loads of toys and dolls to its own factories in Mexico to recheck the ones that have arrived from Chinese contractors in recent weeks “We have had recalls every year since I’ve been here,” Robert A Eckert, Mattel’s chief executive, said in an interview at corporate headquarters here But “the second recall was different; it was going to receive a different level of scrutiny.” With its back-to-back recalls, Mattel — the world’s largest toy maker and the home, among others, of Fisher-Price toys, American Girls dolls, Matchbox cars and, of course, Barbie — has been pitched into the center of a boiling debate over the safety of products made in China The ever-growing pile of products recalled this year has sent consumers digging through their pantries and toy chests, scouting for everything from Thomas & Friends toy trains and children’s jewelry to toothpaste, dog food and, most recently, SpongeBob SquarePants journals Wal-Mart recently disclosed that one of the biggest concerns of its shoppers is the safety of toys from China One mother was so infuriated by the recalls that she brought her children to Mattel headquarters this month with a car full of Mattel toys demanding that the company sort through them to tell her which ones were safe (Mattel found that all of her toys were fine.) “Mattel is very vulnerable in the short term,” said Allen P Adamson, managing director at Landor Associates, a brand-management firm, “because the spotlight is on them and the China issue is such a hot issue.” Mattel has been manufacturing in Asia far longer than many companies (the first Barbie was made there in 1959) That led to long-term relationships with certain Chinese contractors, many spanning decades Paradoxically, that appears to have contributed to Mattel’s problems: the longer it outsourced to a factory supplier with good results, the looser the leash became During Mr Eckert’s tenure, the company has scaled back the number of companies it uses and the fraction of Mattel toys that they make, but it allowed its more reliable suppliers to their own regular toy testing — with spot tests by Mattel only every three months The two contractors that caused this month’s recalls were among the most trusted Lee Der Industrial, the supplier involved in the first recall, had worked with Mattel for 15 years The Early Light Industrial Company, the contractor that made the Sarge cars in the second recall, has supplied toys for 20 years Mattel first got wind of its China problem in early July when a European retailer discovered lead paint on a toy, leading to Mattel’s first recall of 1.5 million toys globally on Aug Mattel shut its production at Lee Der, which made the 83 different recalled toys The recall on Aug 14 was not as large, affecting 436,000 Pixar toy cars, but, combined with a separate recall of millions of toys with tiny magnets that had harmed some children who swallowed them, the blow to Mattel’s public reputation was substantial The Pixar toys were made by yet another contractor, Early Light, which had subcontracted production of the car’s roof and tires to a company called Hong Li Da In both cases, the Chinese companies broke Mattel’s rules on what paint they were allowed to use Mattel has certified only eight paint suppliers Lee Der bought leadtainted paint from an uncertified company Hong Li Da, the subcontractor, used uncertified paint when a tub provided by Early Light ran out “I think it’s the fault of the vendor who didn’t follow the procedures that we’ve been living with for a long time,” Mr Debrowski said He readily acknowledges the rising costs that companies in China are facing “In the last three or five years, you’ve seen labor prices more than double, raw material prices double or triple,” he said, “and I think that there’s a lot of pressure on guys that are working at the margin to try to save money.” But isn’t Mattel putting pressure on its vendors to save money? “No, absolutely not,” he replied “We insist that they continue to use certified paint from certified vendors, and we pay for that, and we’re perfectly willing to pay for that.” On the day of the second recall, Mattel announced a three-point plan that tightened its control of production, cracked down on the unauthorized use of subcontractors and provided for Mattel to test products itself, rather than rely on its contractors The plan also included testing every batch of paint “We realize the need for increased vigilance, increased surveillance,” Jim Walter, who reports to Mr Debrowski on quality assurance, said on the day of the announcement Mattel makes its best-known toys, like Barbie dolls, in its own 12 factories But even as it has increased the share of toys it makes itself to about half, it still relies on roughly 30 to 40 vendors to make the other half Mattel now realizes it was not watching those companies closely enough, executives here said Mattel vetted the contractors, but it did not fully understand the extent to which some had in turn subcontracted to other companies — which in turn had subcontracted to even more Mattel required its vendors to list subcontractors, so Mattel could visit them, but Mattel is investigating whether that procedure has been followed A number of companies whose factories Mattel had never visited may have had a hand in making the toys that were shipped around the world Out of the public eye, Mattel is cleaning house The company has fired four subcontractors and is evaluating more Mattel also moved to enforce a rule that subcontractors cannot hire two and three layers of suppliers below them Mattel executives in Hong Kong are trying to figure out how many subcontractors became part of its lineup Mattel’s Hong Kong office is also investigating to find a common thread among the lead recalls in China Mattel has 200 full-time employees devoted to supervising and training Chinese contractors — but the Mattel employees are not stationed permanently at those factories As part of its effort to rebuild its image, Mattel is emphasizing that it is less dependent on Chinese contractors than most toy makers It has run ads around the world featuring Mr Eckert’s vow to better “There aren’t many companies that own their own factories,” Mr Eckert said in an interview in his office, “and there aren’t many companies that manufacture outside of China.” Mattel closed its last American factory, originally part of the Fisher-Price division, in 2002 The bulk of its products have long been made in Asia In the 1980s, Mattel decided to take more control of its core products, like Barbie and Hot Wheels cars, and built and purchased several factories About 65 percent of Mattel products are made in China now Or, as a Mattel executive rephrased it, more than a third of Mattel toys are made outside of China Many Barbie dolls, for example, are produced in Indonesia Mattel executives showed off a factory in Tijuana, Mexico, escorting a reporter to demonstrate a safety lab with drop machines, temperature checks, not to mention tests for lead in paint Fisher-Price’s Little People houses as well as Barbie playhouses are made there, largely because shipping costs from Asia for larger products add too much to the cost Mattel plans to buy large numbers of a portable lead detector that can be used in all its factories as well as those of its contractors In the last few weeks, the safety lab in Tijuana has been used to double-check the work of Mattel’s Chinese suppliers “It’s to make absolutely sure this issue is behind us,” Mr Eckert said in his office, surrounded by portraits of Barbie by artists like Andy Warhol and Peter Max Mr Eckert has improved the company’s financial performance, but, looking back, he is happy that he resisted calls from analysts early in his tenure to sell off Mattel’s 12 factories and outsource all production When he lectures at business schools, Mr Eckert often cites Johnson & Johnson’s 1982 recall of Tylenol as an example of how to things right and recover from an initial disaster “It is a great example of building trust,” he said “It became kind of a personal mission of the C.E.O at the time, saying, ‘Here is the problem, here is what we’re doing.’ And it was clear that it really was not about the money.” Mattel’s costs of doing business, he acknowledges, will go up with the additional level of testing But the price, he says, will be worth it Mr Eckert also has a new addition to the shelf behind his desk Next to a portrait of his 16-year-old daughter is Sarge, the army-green toy jeep that Mattel recalled last week Mr Debrowski, Mattel’s head of manufacturing, also keeps Sarge on his desk “Just to remember, you know,” he said Copyright 2007 The New York Times Company Discuss the issues of product safety and liability with materials presented in the article (e.g causes and effects, Mattel’s actions, scope of the problems…) Why did Mattel respond the way described in the text? What are the advantages and disadvantages of such moves? What are the lessons learned from the case to Mattel and other international giants in general? And to the host countries? Should Vietnam adopt strict rules/international standards on product safety and liability to regulate domestic companies processing products for MNCs? Explain  ... its lineup Mattel s Hong Kong office is also investigating to find a common thread among the lead recalls in China Mattel has 20 0 full-time employees devoted to supervising and training Chinese... outside of China. ” Mattel closed its last American factory, originally part of the Fisher-Price division, in 20 02 The bulk of its products have long been made in Asia In the 1980s, Mattel decided... of Mattel products are made in China now Or, as a Mattel executive rephrased it, more than a third of Mattel toys are made outside of China Many Barbie dolls, for example, are produced in Indonesia